Financial Management: Investment Appraisal Techniques, Benefits and Limitations

Financial Management
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Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
Q2. Investment Appraisal technique................................................................................................3
Question 3 – Mergers and Takeovers..............................................................................................9
REFERENCES..............................................................................................................................14
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INTRODUCTION
Financial management refers to activity that concerned that planning, controlling and
administering the funds that need to be used in the company (Prihartono and Asandimitra, 2018).
This is area of business management that deals in the usage of certain sources of capital in order
to enable the achievement of goals and objective of the organisation. In this report it is been
discusses about certain investment appraisal techniques that used to take the important decision
and will be useful in enhancing the profitability and efficiency. The need to understand the
importance and will lead to certain benefits to the company if they able to choose the appropriate
appraisal. Apart from it is being discussed about the different financial ratios that will help in
analysing the financial performance of the company. These ratios are very effectiveness to
evaluate the profitability and liquidity in short term and long term and are being used by the
shareholder and other external users.
Q2. Investment Appraisal technique
(a) Calculate (to two decimal places) using the following investment appraisal techniques
The Payback Period- Initial investment/cash flow
Investment- £438,700
Cash flow: Inflow-outflow
= £123,000- £25,500
= 97500
Payback period: 438700/97500
= 4.50 or 4 years and 6 months.
Accounting rate of return = Average annual profit / Initial investment * 100
Year cash inflow
Cash out-
flow
Net cash
flow
Deprecia-
tion
Accounting
profit
1 123000 25500 97500 100681.65 -3181.65
2 123000 25500 97500 73497.60 24002.40
3 123000 25500 97500 53653.25 43846.75
4 123000 25500 97500 39166.87 58333.13
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5 123000 25500 97500 28591.82 68908.18
6 123000 25500 97500 20872.03 76627.97
268536.78
Average accounting profit: 268536.78/6
= 44756.13
ARR: 44756.13/438700*100
= 10.20%
Working Note:
Calculation of depreciation
Depreciation Expenses = (Net Book Value –
Residual value) X Depreciation Rate
Net book value: 438700
Residual value: 15% of cost 65805
Depreciation rate 27%
Year
Net book
value
Resid-
ual
value Rate
Deprecia-
tion
1
438700.0
0 65805 27 100681.65
2
338018.3
5 65805 27 73497.60
3
264520.7
5 65805 27 53653.25
4
210867.4
9 65805 27 39166.87
5
171700.6
2 65805 27 28591.82
6 143108.8 65805 27 20872.03
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